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The geopolitical and market bogeymen of the moment – Kim Jong Un, Vladimir Putin, tariffs, cyber warfare – are riding tall in the saddle.
That’s sparked something of a “flight to safety,” which ignited a bit of an uptick in demand for Treasuries this …

If targeting political extremes generates the most profit, then that’s what these corporations will pursue.As many of you know, oftwominds.com was falsely labeled propaganda by the propaganda operation known as ProporNot back in 201…

This weekend, I’d like to take a slightly nostalgic trip down Memory Lane, into the dark, swirling menacing pool that was the dawn of the Internet. OK, that sentence didn’t end up quite where I meant it to.

When I started my newsletter business in October of 2000, I decided to have a little fun with it on this new thing called the World Wide Web, aka “the internet.” If you, like me, are of a certain age, you remember well that we started every web address with the ubiquitous www.

WSJ: “Ten Years After the Bear Stearns Bailout, Nobody Thinks It Would Happen Again.” Myriad changes to the financial structure have seemingly safeguarded the financial system from another 2008-style crisis. The big Wall Street financial institutions…

It has been 2 months since I last had a chance to respond to reader comments. This seems like a good time to pause and take the opportunity to do so again. Keep them coming!

Today, since I’m in a contrarian mood, I thought I’d focus on ever-so-kindly replying to people who don’t see eye to eye with me…

I really enjoy these exchanges. They get my creative analytical juices flowing, and force me to consider alternative viewpoints which I may not have done initially.

In fact, the more rebuttals I write, the kinder I feel! Which is why I’ve decided to report a special gold opportunity today (continuing our prickly theme with an investment that is the very definition of contrarian right now).

If indeed this inflation hysteria has passed, its peak was surely late January. Even the stock market liquidations that showed up at that time were classified under that narrative. The economy was so good, it was bad; the Fed would be forced by rapid economic acceleration to speed themselves up before that acceleration got out…

(Bloomberg) Jamie Dimon is America’s most famous banker, and Neel Kashkari is its most outspoken bank regulator, so it’s not a shock that they would eventually come to blows. What’s interesting is that their contretemps is over an acronym that most Americans have never heard of, but one that may be central to preventing another recession.

TLAC, which is pronounced TEE-lack, is something you need to know about if you want to judge the sparring between Dimon, the well-coiffed chief executive of JPMorgan Chase & Co., and Kashkari, the very bald man who ran for governor of California on the Republican ticket and is now president of the Federal Reserve Bank of Minneapolis.

On April 6, Kashkari went after Dimon in a way that circumspect central bankers ordinarily don’t. In an essay published on Medium and republished on the Minneapolis Fed website, he challenged Dimon’s assertion in his annual letter to shareholders that 1) there’s no longer a risk that taxpayers will be stuck with the bill if a big bank fails, and 2) banks have too much capital (meaning an unnecessarily thick safety cushion). Wrote Kashkari: “Both of these assertions are demonstrably false.”

Liquidity moves markets!

This is where TLAC comes in, so bear down for a bit of bank accounting. TLAC stands for total loss-absorbing capacity. The more capacity that a bank has to absorb losses, the smaller the risk that it will require a taxpayer-funded government bailout. So lots of TLAC is good. But not all TLAC is created equal. Kashkari argues that a lot of what Dimon calls TLAC on paper wouldn’t be available to absorb losses in a real-world crisis.

Imagine that a whale swims up the Thames River and beaches itself in the City of London, causing billions of dollars in losses to Bank X. If the loss is really big or Bank X is weak (unlike JPMorganChase, which most emphatically is not weak), then one such hit could push it into insolvency. The first thing that happens is that the price of the stock falls to zero. Shareholders, in other words, are the first to absorb losses. That’s fair: Shareholders get all the profit that a bank makes after paying its expenses, so they should have to take the hit when the bank’s profit is wiped out unexpectedly.

The fight between Dimon and Kashkari is over who absorbs the rest of the loss. According to Dimon, it’s the unsecured bondholders. (Unsecured meaning they don’t have a legal claim to any specific asset on the bank’s balance sheet.) Unsecured bondholders are informed that, sorry, there’s been a loss. They’re not going to get their interest payments anymore, and their bonds are being converted into common shares. Now they’re at the back of the line with the rest of the bank’s shareholders; they’ll get paid only if the bank starts making a profit again.

The beauty of the system outlined by Dimon is that taxpayers aren’t exposed to risk because if a bank gets in trouble it has a great, big escape hatch: It simply wipes out its bondholders, thus conserving its money.

“It sounds like an ideal solution,” Kashkari writes. “The problem is that it almost never actually works in real life.” In a financial crisis, regulators worry about contagion. If bondholders of one bank are defaulted on, those of other banks will worry they’re next and yank their support, causing a downward spiral of confidence that crashes the economy. So the regulators make sure bondholders keep getting paid.

“Indeed,” Kashkari writes, “the most recent crisis showed that even some debt holders who had been explicitly told that they would take losses during a crisis got bailed out.”

Kashkari argues that regulators and bankers should stop acting as if bonds are part of TLAC (which, remember, stand for total loss-absorbing capacity), because when push comes to shove, bondholders will absorb few if any losses. Taxpayers will be forced to step up and make sure they keep getting paid.

Kashkari also disses Dimon’s argument that banks’ safety cushions are needlessly thick. Dimon wrote to shareholders that if the Federal Reserve standards weren’t so tough, “banks probably would have been more aggressive in making some small business loans, lower-rated middle market loans, and near-prime mortgages.” Kashkari’s response? “Mr. Dimon argues that the current capital standards are restraining lending and impairing economic growth, yet he also points out that JPMorgan bought back $26 billion in stock over the past five years. If JPMorgan really had demand for additional loans from creditworthy borrowers, why did it turn those customers away and instead choose to buy back its stock?”

Mr. Kashkari has a valid point. Check out the bank capital to total assets during the housing bubble of the last decade. From 2004-2007, bank capital to total assets exceeded 10%, but fell under 10% for 2008. And we all remember TARP (the Troubled Asset Relief Program signed into law on October 3, 2008). Starting in 2o08, bank capital was strengthed to 12.74% of total bank assets by 2010, but has slipped to under 12% by 2013.

Of course, not all capital (and capital ratios) are equal. Take a look at Chase Bank’s Basel III standardized regulatory capital and advanced transitional regulatory capital. Chase Bank’s Tier 1 capital under Basel III Advanced Transition is now under 10% at 9%. JPMorgan_Chase_Co_4Q16_Basel_Pillar_3_Report

Can any large bank survive if home prices and/or commercial real estate prices burst and fall 20%?

So while it seems that Dimon is correct (stiff the unsecured bondholders), Kashkari is also correct in that regulators may panic (again) and try to preserve the unsecured bondholders. That is, bail out the unsecured bond holders.

Wall Street Examiner Disclosure:Lee Adler, The Wall Street Examiner reposts third party content with the permission of the publisher. I am a contractor for Money Map Press, publisher of Money Morning, Sure Money, and other information products. I curate posts here on the basis of whether they represent an interesting and logical point of view, that may or may not agree with my own views. Some of the content includes the original publisher's promotional messages. In some cases I receive promotional consideration on a contingent basis, when paid subscriptions result. The opinions expressed in these reposts are not those of the Wall Street Examiner or Lee Adler, unless authored by me, under my byline. No endorsement of third party content is either expressed or implied by posting the content. Do your own due diligence when considering the offerings of information providers.

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